Five Ways Large Corporations Structure Innovation Initiatives

“Andy Grove, who helped found Intel and then led the enterprise for years as its CEO and chairman, has taught me some extraordinary things. One of them occurred in a meeting where he and several of his direct reports were plotting the launch of their Celeron microprocessor. I was there as a consultant. The theory of disruption had identified a threat to Intel. Two companies – AMD and Cyrix – had attacked the low end of the microprocessor market, selling much lower-cost chips to companies that were making entry-level computers. They had gained a significant market share and then had begun moving up-market. Intel needed to respond.

During a break in the meeting, Grove asked me, “How do I do this?”

I readily responded that he needed to set up a different, autonomous business unit that had a different overhead structure and its own sales force.

Andy said, in his typical gruff voice, “You are such a naive academic. I asked you how to do it, and you told me what I should do.” He swore and said, “I know what I need to do. I just don’t know how to do it.”

When facing disruption Christensen’s recommendation is important. When it comes to building new businesses, especially those that could put your core business at risk, it’s important to create a new sandbox for that business to isolate it from the broader organization. That way when the forces of corporate inertia take hold, the new business will have a chance to survive and thrive.

But to Andy Grove’s point, how exactly do you do that?

Well in general there are five options.

Option 1: Internal Program

This is likely the most common structure that corporations use when trying to build new businesses. Instead of going through all the legal and organizational complexities involved with creating a new independent entity why not just build it in-house and give the new team their own space?

For the sponsoring company doing the new initiative in-house is not only simpler but also allows for the company to capture the full value of the initiative. In addition it enables the host to fully leverage their existing scale when bringing the new product or service to market.

On the downside however this structure can be fraught with challenges. The biggest challenge being still beholden to the internal forces of corporate inertia. For sustaining innovations that’s usually not a problem but for disruptive or integrative innovations, this can be a killer.

Option 2: Traditional Corporate Venture

Many organizations that reach a meaningful size will consider opening up their own venture fund. One of the more famous examples of this is Google Ventures.

Google Ventures has invested in a number of promising companies including Uber, Slack and DocuSign. For businesses like Google, creating a corporate venture fund can be highly valuable. The main benefit is the relationships created and the opportunities for collaboration between the core business and the new startup/investment. It’s also a great way to create a pipeline for M&A activity.

For a detailed guide on how to build a world-class corporate venture capital organization, see these posts from Evangelos Simoudis, a respected Silicon Valley VC investor.

Option 3: Spin-Out and Spin-In Venture

This concept, made famous by Cisco, is akin to the idea of creating a made-to-order company that is sponsored by the host organization but not controlled. In learning about this model I came across a good article by Bruce Cleveland at Rolling Thunder that explains it well. In it they define a spin-in as the following:

“A company formed with the explicit endorsement and investment – including personnel, cash and IP – by a large company and venture investors. The express purpose of the spin in is to build strategic products and/or go after new markets with the ultimate objective that the large company will acquire the spin in at some point in the future.”

The most famous examples of spin ins were done by Cisco over the last 20 years though their approach has changed somewhat recently. The classic example was when Cisco faced a disruptive new technology, software defined networking or SDN, and carved out a core team of top engineers who they gave substantial equity to build a new business with a new SDN offering. After nearly 2 years these three engineers, Mario Mazzola, Prem Jain, and Luca Cafiero, built the new SDN offering and sold their remaining equity back to Cisco and became multi-millionaires. This article in Business Insider describes it well.

The approach was hailed by Cisco’s then CEO John Chambers as a tried and true way for Cisco to address disruptive threats and retain key talent in the organization. The downside is it led to some resentment among employees who were not chosen to participate in the new venture. Several of those people did end up leaving.

Option 4: Enterprise Hosted Accelerator

These days accelerators are all the rage. Startup founders love them because they provide access to mentors, facilities and seed money to get their idea off the ground. VC’s love them because they provide a systematic approach, often based on Lean Startup principles, to getting entrepreneurs in shape before they are pitched for a substantial investment. Some of the more prominent accelerators such as YCombinator and TechStars have produced breakthrough hits including Airbnb, Reddit, Sphero and Uber.

A more recent take on accelerators has been enterprise hosted accelerator programs. This approach is explained in the book The Lean Enterprise: How Corporations Can Innovate Like Startups. These programs can be setup by TechStars in partnership with a large organization that is seeking to foster disruptive innovations in their industry. For example, the “Powered by Techstars” program has accelerators hosted by Ford, Honda, Verizon, Sprint and McDonalds.

For the host organizations these accelerators can offer fantastic benefits such as the following:

Access to talented and innovative entrepreneurs in their industry

Improved corporate culture that fosters new ideas and gives star employees a chance to run with an idea

An investment and acquisition pipeline to feed business development efforts

A commercialization platform for R&D efforts that may not fit the traditional business model

On the flip side, the entrepreneurs who work with an enterprise-hosted accelerator get incredible benefits as well including access to deep industry know-how and a ready suitor when the time comes to raise more funds or sell the company.

As the millennial generation continues to proliferate throughout the workforce it’s likely that within 5-10 years many more corporations will have established an enterprise hosted accelerator program.

Option 5: Joint Venture

To round out the list the last option is to setup a joint venture. A joint venture is typically described as a new venture created by two or more existing firms who contribute cash, talent, IP and/or other resources in order to unlock new value. The companies that invested in the JV become the principles of that JV and usually control the board of directors.

The best example of a recent JV that has seen success is Hulu. When online streaming services such as Netflix became recognized as a real threat to the traditional network and cable channels, three of the large networks banded together to create a new online platform that they could grow with and participate in. The three networks that created Hulu were Fox, ABC and NBC.

The biggest opportunity with JV’s is the ability to reach scale quickly and be guided by industry experts from the sponsoring organizations. Often the biggest challenge with JV’s is putting a deal together in the first place and even once it’s put together it can be a challenge to properly manage the direction of the JV given the often competing interests of the partners involved.

For more on how to create a JV, see this article by London Business School professor Sikander Shaukat.